Balanced Budget Helps Economy More Than Tax Cuts

JANE BRYANT QUINN Staying Ahead

August 2, 1997|JANE BRYANT QUINN Staying Ahead

NEW YORK — Deep down, elections aren't about economics. It only seems that way.

Elections are about cutting up the federal pie. Who gets the tax cuts? Who gets the subsidies and spending programs? Which businesses or causes get a respectful hearing? Who sleeps in the Lincoln bedroom?

Democrats make different choices than Republicans do. But they're each handing out the money in their separate way. As Lily Tomlin has said, no matter how cynical you become, it's never enough to keep up.

Congress has more say than any president about cutting up the pie. A president can counter by vetoing anything too wide of his mark.

This is the endgame being played out in Washington today: taxes and spending as a spoils system, in as naked a display as you'll ever see.

The petitioners try to spread a verbal fig leaf over their desires. Take the tax cut on capital gains. They say, ``Gotta have this cut to encourage entrepreneurship and investment in stocks.''

But who are they kidding? Entrepreneurship is booming and the Dow Jones industrial average is over 8,000.

Reduced capital gains taxes won't affect people who invest through retirement plans _ the favored vehicle of the middle class. Withdrawals from retirement plans are taxed at ordinary income rates.

Capital gains taxes are due on profits racked up outside these plans. Such gains mostly accrue to the well-to-do.

There's no economic reason to cut the estate tax, either. This tax doesn't stop people from starting businesses or maximizing their investments. Only 1.6 percent of estates were large enough to owe federal taxes last year. Good planning keeps family businesses going.

President Clinton's tax deduction and credits for education also lack a sound economic rationale. They aren't targeted on improving enrollments. Most of the money will go to students who would have entered college anyway.

The $500 tax credit proposed for each child expressly violates the tax cutters purported rationale, which is to encourage saving and investment.

This credit is a pure consumption booster, in an economy that's already running flat-out.

For promoting new savings, Congress is promoting a new American Dream Individual Retirement Account.

Any worker, regardless of income, could put $2,000 into a Dream IRA after tax ($4,000 for couples). If you held for at least five years, you could take out that money for any purpose entirely tax free.

But many investors will simply be moving money out of taxable accounts into potentially tax-free accounts _ cutting their tax bill without increasing their savings one dime. Those who don't have savings already may not be able to afford an IRA.

One tax cut can be sold on principle, as a tax-simplification measure: The tax bill proposes to end the tax on most capital gains when you sell your principal home.

You wouldn't have to roll profits forward or keep a record of the cost of home improvements, as you do now. Married couples could take up to $500,000 in profits tax free, and singles, up to $250,000.

But the wealth gap between renters and homeowners _ large already _ would widen into a chasm. Nothing proposed in this law helps renters reduce their costs.

Personally, I'd can all the tax cuts _ the capital gains cut, the estate tax cut, the college credits, everything _ and put that revenue toward budget balance.

Reducing the deficit, which helped bring interest rates down, has done more for the economy and investing _ hence more for the largest number of people _ than anything else.

In boom times like these, with tax revenues pouring in, you're supposed to balance the budget and build a surplus. Tax cuts should be saved for times when business slows down.

But with true budget balance within its grasp, Congress has decided to wait for another day. Passing out tax cuts is a lot more fun.